Turkey: Grey Times Ahead Due To The Reduction In Consumer Loan Growth

Turkey demonstrated high economic growth rates till the year 2017. According to Turkish Statistical Institute, the gross domestic product (GDP) of the country grew by 7.4% in 2017 alone, making it the second-fastest growing economy, after Ireland with 7.8% GDP growth rate.

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However, even at the time of growth and good times, it was quite apparent that the upside is due to government intervention and excessive borrowings. The excessive growth was a result of increased domestic consumption that also led to an unruly inflation of about 12% in consumer prices. This type of growth is difficult to sustain. It was foreseen by the analysts that the spectacular growth is going to be short-lived.

Fast forward to the beginning of 2018, Turkey remained to be one of the fastest growing economies in the world. The economy expanded by 7.4% in the first quarter of 2018 as well. However, the Central Bank of Turkey was forced to increase the interest rates by a total of 500 basis points from April 2018 to June 2018. This became necessary in order to sustain the hot money coming into the debt-laden economy of the country.

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The detrimental consequences began to show recently when the loan growth slowed to about 4% in the middle of August 2018. The consumer loan growth reduced to about 14% and the commercial loan growth became negative! Overall, this loan growth has been the slowest since 2009.

The slowdown in the consumer loan growth manifested itself in the form of reduction in the sales of consumer products, too. The sales of cars slumped by 20.5% in the second quarter of 2018 and the sales of mortgage declined by 6.5% in the same period. Although, the public sector lending is still outpacing the private sector lending.

As a result of the continuing decline in the loan growth in the commercial segment, the private investments are also expected to remain low. Lira has lost about 15% of its value in the past year, which adds to the numerous challenges. The weakness makes it expensive for the country to service its debt stock and also increases the costs of the imported products.

As a bottom line, the loan growth, along with the consumption and investment growth in Turkey, is expected to get more dampened in the future. This is likely to impact the internal production and sales, as well as the external shortfall, resulting in a narrower current account deficit. The imbalances are of a high magnitude due to the prolonged disparities. The current inflation rate of 15% and the deterioration in the net international investment make the situation more complicated.

As of now, CBRT is using approaches like managing the foreign exchange liquidity and focusing on their own currency, rather than using the strict approaches like increasing the policy rates. However, it has become mandatory for the governing bodies like CBRT to tighten the economic policies and keep them in control for a long period to ensure economic stability and growth of the country.

Sweeny graduated with a Masters in Forensic Science, after which she decided to work in finance. She worked for five years as a Senior Research Associate at S&P Capital IQ. She lives with her son and husband in Gurgaon, India. - Contact her at [email protected]

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